By: Robert Ferris, Ph.D.
This Article Discuss What is Takes to Deliver the First Big Nanotechnology Innovation
Nanotechnology is a foundational innovation in that it is a new way of making and characterizing materials. Foundational innovations have happened before with steel, polymers, and semiconductors. Each of these innovations drove new products and economic growth. They also created behemoth organizations behind them; for steel is was the Carnegie Steel Company, Polymers produced Dow, Dupont, and BASF, Semiconductors created Intel. Each major innovation created an equally large company. We continue to wait for nanotechnology to produce an equally large, disruptive company.
First off, major industrial innovations typically taking 20-75 years to complete. By many accounts nanotechnology is only 20 years old. So far, Lux research has credited $1 Trillion dollars in global revenue to nanotechnology-enabled products. BCC Research reports state that the industry is supposed to grow at a 18% CAGR through 2021.
The interesting part of these numbers is the mix of large enterprises versus small and medium enterprises (SMEs). The materials world is dominated by large enterprises. But over the past 10 years we have seen a steady trend shifting towards SMEs. Now, roughly 50% of the patent filings in advanced materials and nanotechnology are from SMEs.
The number of nanotechnology SMEs have the potential to revolutionize markets, but few have disrupted the current market dynamics. Most advanced materials SMEs end up as either lifestyle businesses or acquisition targets for larger companies. In fact, an analysis by Bonardo concluded that nanotechnology companies had lower profitability and higher likelihood of M&A than other IPO companies. Based on an analysis of 20 M&A deals, the average nanotechnology acquisition deal is around $110M, lower than the US national average of $700M. Also, most of nanotechnology-enabled companies that have gone public have negative returns. The Lux Nanotech index fund continues to suffer and the Merrill Lynch Nanotech Index was de-listed in March 2014.
Lux Nanotechnology index (LUXNI) versus the S&P 500 over the past 10 years. Credit Google Finance.
Most nanotechnology companies become acquisition targets because either 1) they only address a niche need, or 2) they fail to excel at managing a real business.
An example of a growing niche technology is Industrial Nanotech’s Nansulate® product. With a thin coating, the ceramic microbeads dramatically reduce heat conduction in both industrial and residential applications. Insulation has been around for centuries, it isn’t new. So Nansulate®, while impressive improvements is more of an incremental improvement. Now, there are people who are willing to pay for these improvements. But the bulk of the market will likely stick with fiberglass of foam insulation. Industrial Nanotech is doing well and carving our a nice section of the market, noted by the recent $9M deal. But they aren’t going to take over the whole insulation market. They have found a niche need and will continue as a mid-sized growth company or acquired by a large insulation provider like John Manville.
There are far more nanotechnology companies struggling to build a strong business around their technology. Many venture capital teams note that the domain experts are all academics. The reality is that the skills needed to discover a nanotechnology is completely different from those needed to build a company. The most recent acquisition of Nanosphere is an example of this dichotomy. Nanosphere sells nanoparticles for biomedical research. They had impressive sales and a manufacturing capabilities when they were acquired by Luminex. During the announcement CEO of Luminex stated that “[Nanospheres’] impressive year-over-year growth combined with the uncertainty in their financial position created an attractive opportunity for Luminex.” Ouch. Homi Shamir is basically saying that the debt Nanosphere issued opened the door to a cheap $58M acquisition. I wonder how much money Nanosphere left on the table.
Still, the industry continues to look for the nanotechnology equivalent to IBM, Apple, or Google. These massive companies redistribute market wealth. They are disruptive in that the right technology can wipe out established organizations. More often a nanotechnology starts at the high-end, high value part of the market and grows into the low-end application of an underserved population. This is different from Clayton Christensen’s definition of disruption, but equally capable of taking over a market.
The reason nanotechnology is still looking for their big win is because there are few technologies that can cause major market distribution. The big examples of a disruptive innovation are steel, the assembly line, and automation. These are once in a lifetime type of innovations. Specifically for nanotechnology, you need a support infrastructure to decrease transaction costs. Also, it takes time to develop the right commercialization expertise. But still we wait for the big nanotechnology breakthrough. So, as we wait, here are a few ideas on what we are waiting for.
A Whole New Material
The first and most obvious example would be invention of an entirely new material. Not a nanoparticle material, but an entirely new bulk material that replaces the current industry standard. Think plastics. Or, the recently discovered Iron Nitride magnet. These types of discoveries are once in a lifetime and equally rare to commercialize, but when they happen it causes a massive redistribution of supply chain, products, and applications.
A Whole New Process
The next potential for a big win is a new manufacturing process that enables an order of magnitude reduction in cost or improved capabilities. Currently nanotechnology suffers from high-cost, batch scale production. But imagine a process that delivers nano-scale production precision at large-scale production. Examples of process innnobvations include the scalable atomic layer deposition process of ALD Nanosolutions, roll-to-roll manufacturing like Liquidia, or 3D printing like Carbon 3D. Process innovations are tricky, because they typically benefit large scale producers, but all we need is a major process innovation to connect with an industry need.
A Disruptive Additive
The third opportunity for market redistribution is an enabling additive that takes a cheap bulk material and enables it to perform like a high-end product. Materials like carbon nanotubes, graphene, and nanoparticles fall into this category. If a small amounts of a nano-additive enables disruption of a large market with a lower-cost option, you have a massive market redistribution. A real-world example of this is GoreTex® where their flourinated polymer coating drives products ranging from healthcare to sporting goods. With companies like Haydale, OCSiAl, and Cabot the carbonaceous materials can start to influence the composite, adhesives, and polymers space.
While a great technology sets a foundation for success, you need more to build a successful business. A company is positioned for success if they have the right team, market, and customer pull. Having this combination is unique for any company, but they are essential for building the first multi-billion dollar nanotechnology conglomerate.
That’s all for now, thanks for reading!
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